Jean Luc Pepin Research Chair
University of Ottawa
I recently had the opportunity to participate in the Walter Gordon Symposium at Massey College in Toronto. The theme of the symposium was aptly chosen by the students. They wanted a discussion of how complexity has shaped our institutions and policy-making processes over the past decades, and the lessons we have learned about it.
It is a terrific and difficult topic that requires a true public intellectual like Walter Gordon. Mr. Gordon was a former Finance Minister, public servant, businessman and writer. He wrote a book in the mid seventies entitled Storm Signals: New Economic Policies for Canada. It was one of the first economic policy books I owned. He made the case that complex policy issues needed to be examined and debated. The storm signals have shifted. In the 1970s, Mr. Gordon was concerned about inflation from oil price shocks. Today, many parts of the world worry about deflation caused by weak demand. Policy environments are complex. They are dynamic.
Complexity is often interpreted as something with many parts that interact in multiple ways. It increases when multiplicity, interdependence and diversity goes up. I think we have more of all with respect to macroeconomic policymaking and institutions today.
Complicated systems (as opposed to complex systems) have moving parts but they operate in patterned ways. When economists produce forecasts, they often do a decent job in capturing short-term trends when the economy is operating near its potential. Economic agents behave in patterned ways. When Election Canada runs an election process they do a good job. It is complicated, but they have done the process before.
Complex systems (as opposed to complicated systems) may operate in patterned ways but the interactions change. The long-term impact of the interactions are not always clear to the participants. The development and use of financial derivatives are examples of interactions that have changed our economic landscape. Have we done a better job in managing economic risk? In a Parliament setting, the use of omnibus bills make sense when governments want to move forward with policy in an integrated way (e.g. environment, aboriginal issues etc). It now appears they have become the “new normal” for budget implementation.
In an ‘ordered’ complex system, the level of constraint means all agent behavior is limited to the rules of the game. In the mid 1990s, when Canada’s net debt to GDP ratio approached 100% there was pressure from the financial markets. There were signals that we were about to lose our credit rating. In an “ordered’ parliamentary financial cycle, we will have federal budgets before the start the fiscal year (unlike this year) and before Members of Parliament are asked to vote on the supply of spending authorities for the government.
In a ‘disordered or chaotic” system agents are not constrained. Credit is made freely available to allow unsustainable growth in house prices and household debt. Governments accused of “contempt of Parliament” for not providing information to Members of Parliament are rewarded in an election with a majority mandate.
Canada went into the 2008 world financial crisis in relatively good shape. Economic growth was strong. We had fiscal surpluses for many years and a low debt to GDP ratio to show for it.
The government did not see the crisis coming. In a complex financial environment it is difficult to see over the hills. We were also guilty of willful blindness. Margaret Hefferman says “when we are willfully blind, it is in the presence of information we could know, and should know, but don’t know because it makes us feel better not to know”. How could we believe double digit growth in house prices were sustainable? They were not. How could we believe the current high levels of household and consumer debt relative to incomes are sustainable? We shall see.
The government ran a very successful fiscal stimulus package. It was deficit financed. It was a good example of positive complex adaptive behavior. Parliament played a key role in the generation and oversight of fiscal stimulus in 2009 and 2010.
With deficits accumulating and the government’s economic narrative under challenge, it started to bury fiscal costs (e.g. fighter planes, crime bills). It used misinformation to change programs like Old Age Security. It was not clear with Canadians on the impacts of the change to the Canada Health Transfer. The government has hid the service level impacts of austerity measures since Budget 2012.
Two challenges of complex systems are making sense of the situation and unintended consequences.
I think we misinterpreted the economic situation since the 2008-09 recession. Weak global demand and record low interest rates created the context to move forward with pro growth long term investments. It was not the time for short term austerity. Measures.
I think we validated bad behavior. Canadians rewarded a government facing contempt of Parliament with a majority in the 2011 election. As it was said in the cartoon Pogo, “we have met the enemy and he is us”.
How have we responded as a country to growing complexity?
On macroeconomic policy making, I think our record is mixed. We need a crisis to make substantive necessary changes. We manage short term political and economic downside risks better than long term risks (upside and down),
Our institutions and leaders are struggling. Parliament is moving from an ordered complex system to a disordered or chaotic system were political behavior is not being constrained by rules. The unintended consequences of weak institutions are significant. The institutions and their leadership are the instruments to tackle 21st century storm signals – weak innovation, climate change, health care reform, and growing income disparities, amongst others.
In terms of complexity theory, we appear to be trapped in a series of negative feedback loops. We have inflicted ourselves with destructive strategies – the medical equivalent of a type of flesh eating disease for institutions. The government cuts taxes – to run deficits – to cut spending – so it can cut taxes further. The government makes the case for smaller government by making it incompetent through spending cuts without plans. The government focuses on the needs of a limited core constituency that it believes will turn out on voting day. The political strategy for the rest is deliberate disenfranchisement. The governing party runs negative campaigns that attacks the character of political opponents? How do you fight negativity without going negative?
I think we need a person like Walter Gordon to run a Royal Commission to renew our institutions. It is a big problem that appears difficult for our current leaders to address. They need help. They need support and evidence.
I think our leadership approach must change. We have controllers today. We need builders. We must restore the compact that Edmund Burke talked about between generations past, present and future. Change is coming. In a knowledge and information economy, real power is generated by networking.